Trust Accountings | Discovery of Fraud and Embezzlement

Trust Accountings | Discovery of Fraud and Embezzlement

Trust accountings can be routine or the genesis for shocking discoveries of embezzlement and trustee fraud. Embezzlement is the fraudulent appropriation of property belonging to someone else by a person to whom it has been entrusted. The theft of property with a value of more than $950 can be prosecuted by law enforcement agencies as a felony. Civil wrongs stemming from the same acts may be litigated in the civil courts.

Before exploring some recent criminal prosecutions against trustees who embezzled funds and defrauded beneficiaries it will help to have a little background on the law regarding trustee accountings. I am a California lawyer, so my references will be to California law.

(a) All accounts shall state the period covered by the account and contain a summary showing all of the following, to the extent applicable:

(1) The property on hand at the beginning of the period covered by the account, which shall be the value of the property initially received by the fiduciary if this is the first account, and shall be the property on hand at the end of the prior account if this is a subsequent account.

(2) The value of any assets received during the period of the accounting which are not assets on hand as of the commencement of the administration of an estate.

(3) The amount of any receipts of income or principal, excluding items listed under paragraphs (1) and (2) or receipts from a trade or business.

(4) Net income from a trade or business.

(5) Gains on sales.

(6) The amount of disbursements, excluding disbursements for a trade or business or distributions.

(7) Loss on sales.

(8) Net loss from trade or business.

(9) Distributions to beneficiaries, the ward or conservatee.

(10) Property on hand at the end of the accounting period, stated at its carry value.

(b) The summary shall be in a format substantially the same as the following, except that inapplicable categories need not be shown:

SUMMARY OF ACCOUNT

CHARGES:

Property on hand at beginning of
account (or Inventories)

$

Additional property received (or
Supplemental Inventories)

Receipts (Schedule ______)

Gains on Sale or Other Disposition
(Schedule _______)

Net income from trade or business
(Schedule_______)

Total Charges:

$

CREDITS:

Disbursements (Schedule _______)

$

Losses on Sale or Other Disposition
(Schedule _______)

Net loss from trade or business
(Schedule ______)

Distributions (Schedule ______)

Property on hand at close of account
(Schedule ______)

Total Credits:

$

(c) Total charges shall equal total credits.

(d) For purposes of this section, the terms “net income” and “net loss” shall be utilized in accordance with general accounting principles. Nothing in this section is intended to require that the preparation of the summary must include “net income” and “net loss” as reflected in the tax returns governing the period of the account.

Trust and Estate litigation counsel are often retained to sue Trustees who choose to violate the duty to account. We have laws that require trustee accountings to keep trustees from needlessly endangering trust beneficiaries. Trustees, whether banks, trust companies or individuals, must follow these laws.

When a trustee does not provide an accounting, the odds skyrocket that there has been a breach of fiduciary duty. Forensic accountants are called in to determine if this conclusion is right. Violating the rule exposes beneficiaries to partial or complete loss of assets that a deceased parent or relative wanted them to have. These are some unfortunate examples that involve individual trustees (a CPA, two attorneys, a financial advisor, a son, a nephew and two caregivers):

Illinois certified public accountant, Sultan Issa, was charged with criminal fraud for allegedly embezzling at least $55 million from a Chicago family and its related business entities, including trusts established for charitable giving and to provide for his large family. The case is currently pending in federal court in Illinois.

Longtime Connecticut trusts and estates attorney, Robert J. Barry, pleaded guilty to one count of wire fraud relating to his theft from elderly client trust accounts. Barry would often designate himself as successor trustee in trusts that he prepared for clients. He also had himself named as executor of his client’s estate upon death.

The Department of Justice press release describe his scheme: “Beginning as least as early as 2008 and continuing until approximately December 2015, BARRY engaged in a scheme to defraud an elderly victim by stealing money from the victim’s client trust accounts while the victim was alive, and then stealing money from the victim’s estate after the victim died… Through this scheme, BARRY stole more than $2.4 million from the victim and the victim’s estate.”

Michigan financial advisor, David Homan, was charged with felony embezzlement charges for allegedly stealing more than $500,000 for a trust fund where he was the appointed trustee for two elderly clients. An independent audit of the trust fund showed significant electronic transfers of money from the fund to Mr. Homen’s personal bank accounts. Homan pleaded guilty in November 2018 to one felony count of embezzlement between $50,000 and $100,000. He was sentenced to two to 15 years in prison and ordered to pay restitution in the amount he stole – $513,211.56.

Ohio caregiver, Teresita Sidoti, pleaded guilty to bank fraud and filing false tax returns related to her embezzlement of $156,949.75 between 2009 and 2015 from a trust established by the victim’s parents to pay the medical expenses for an Ohio resident, Noel Zugay, totally disabled with multiple sclerosis. The U.S. Attorney’s office handling the case said that Sidoti worked as Zugay’s caregiver and controlled bank accounts for Zugay and the trust. She took the money by writing checks to herself, transferring money online and by making withdrawals in person. Sidoti was sentenced to 2 ½ years in federal prison for defrauding the trust.

A 58-year-old Michigan man was sentenced to 23 months to five years in prison for embezzling over $20,000 from his 93-year-old mother. Family members contacted law enforcement when they became concerned that the man was siphoning money from his mother. This initiated a Michigan State Police criminal investigation and charges were brought against the son.

Ricky Bradford Willson, holder of a durable power of attorney for his 90-year-old great aunt, “transferred $120,000 in cash from his aunt’s bank account into his, signed a quit claim deed transferring her house in …(Michigan) to himself, and transferred the title of her classic 1967 Ford Mustang convertible to himself.” Attorney General Dana Nessel called this “a classic example of financial elder abuse: a trusted relative who took advantage of his aunt.”